Taiwan: 7 likely outcomes in 2017
15 November 2016
Economics
Taiwan: 7 likely outcomes in 2017
DBS Group Research
15 November 2016
• The economy will grow by about 2% in 2017, faster than in 2016 but still
below potential
• The labour market will recover but not significantly
• Inflation will remain stable and low at about 1%
• The central bank will keep interest rates low, notwithstanding higher
USD rates and a stronger US dollar
• Local property prices will remain high
• Outward portfolio and direct investments will be large
• Government policies may focus on structural issues
Thus far, 2016 has been a mediocre year for Taiwan. Economic growth averaged
but 0.8% (YoY) over the first three quarters. In spite of this, the central bank cut
rates only modestly (25bps in 1H16). The government maintained a neutral stance
on fiscal policy, balancing the needs of growth with that of lowering public debt.
Looking ahead to 2017, growth should improve but only modestly. There should
be less pressure on the central bank / government to pursue short-term stimulus.
Policies are likely to focus more on long-term structural issues.
1) GDP growth will rise to about 2% in 2017
Thanks to its small and open economy, growth follows the global cycle closely
(correlation: 0.83 in 2000-15, Chart 1). Growth has fallen significantly since 2012
and turned especially weak in 2015/16, in line with global patterns. According to
Chart 1: GDP growth: Taiwan vs. Global
Chart 2: Taiwan's electronics exports
% YoY
12
USD bn
10
10
Taiwan
iPhone 7
9
Global
iPhone 6
iPhone 4S
8
8
iPhone 4
6
4
IMF
forecast
7
6
iPhone 3G
iPhone
5
2
4
0
DBSf
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016F
2017F
-2
3
2
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Ma Tieying • (65) 6878-2408 • [email protected]
Refer to important disclosures at the end of this report.
1
Taiwan: 7 likely outcomes in 2017
15 November 2016
Chart 4: Unemployment rate
Chart 3: Taiwan's exports to China
USD bn
% sa
9
6.5
Total
Electronics
Non-electronics
8
6.0
7
5.5
6
5
5.0
4
4.5
3
4.0
2
3.5
1
0
Jan-04
Jan-07
Jan-10
Jan-13
Jan-16
3.0
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
the IMF’s latest World Economic Outlook, global growth will rise to 3.4% in 2017,
a modest uptick from 3.1% in 2016, and on par with the average growth seen in
2012-15. If history is any guide, Taiwan’s growth should also pick up next year. We
expect 2.1% growth in 2017, close to the 2012-15 average of 2.2%.
Electronics exports are critical for Taiwan. The pattern here is heavily influenced
by the product cycle in the global smartphone market. The launch of the new
iPhone models boosted Taiwan’s electronics exports almost every year in 20072011 (Chart 2). But this so-called “Apple effect” weakened somewhat after 2012,
probably because technology started to mature and competition intensified in the
global smartphone sector.
In recent years, only the iPhone 6 (2014) and the iPhone 7 (2016) had a large impact on electronics exports. In 2017, many expect Apple to push through with a
major product redesign, a three-year lag following the last major redesign – the
iPhone 6 in 2014. This will coincide with iPhone’s 10th anniversary. If so, this
bodes well for Taiwan’s electronics sector. For now, the US-based IT research firm
Gartner projects global semiconductor capital spending to grow by 7.4% in 2017,
a notable rebound compared to -0.3% in 2016. Taiwan’s Industrial Economics &
Knowledge Center also forecasts that the output in Taiwan’s semiconductor sector
will grow a healthy 4.2% next year.
Export demand from China is also important. Taiwan’s exports to China have been
stagnant since 2012, when China’s GDP growth dropped to 7% and global commodity prices started to languish (Chart 3). Exports to China contracted in 2015,
as China’s growth dropped further to 6% and commodity prices fell more sharply.
This year, demand from China has stabilized and rebounded since 3Q16. But the
rebound has been mainly driven by electronics, which could reflect demand in the
iPhone supply chains (also Chart 3). For the coming year, consensus is looking for a
further slowdown in the Chinese economy (IMF: 6.2% in 2017 versus 6.6% in 2016,
Bloomberg: 6.4% versus 6.7%). Growth deceleration and economic rebalancing
on the mainland could continue to present headwinds for Taiwanese exporters.
A possible rise in trade protectionism from the developed countries, as a result
of Brexit and the anti-trade stance of the US president-elect, is an additional risk.
Tariff/currency disputes between the US and China could hurt Taiwan’s exports indirectly. Note that Taiwan also has close trade ties with the US and Europe directly
(12%, 9% of its total exports respectively). Like China, it is also on the US Treasury’s
watch list for unfair FX practices.
2
Taiwan: 7 likely outcomes in 2017
15 November 2016
Chart 5: Wage growth
Chart 6: Food, energy and CPI inflation
% YoY
% YoY
10
10
Minimum wages
8
Average regular wages
5
6
0
4
-5
-10
2
-15
0
-20
-2
-25
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
-4
Headline CPI
Food
Energy
-30
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
2) The labour market will recover, but not significantly
Modestly better GDP growth should benefit the labour market. The unemployment rate, which has been crawling up this year, will likely come off the peak in
2017 (Chart 4).
That said, the expected rise in growth, which is largely driven by electronics exports, may not benefit the labor market significantly. The electronics sector accounts for 15% of Taiwan’s GDP, but only 8% of its total employment, reflecting
the relatively high productivity in this sector. Companies in the non-electronics
manufacturing and services industries would remain cautious about their manpower plans, absent a substantial improvement in their earnings outlooks.
3) Inflation will remain stable at about 1%
Absent a strong labour market recovery, faster wage-push inflation is unlikely in
2017. It is true that a 5% minimum wage hike is scheduled for next January. This,
however, will only affect about 1.6mn workers whose monthly pay is below TWD
21,009 (less than 15% of the total employment). Note that minimum wages have
been raised almost every year since 2011, but the passthrough on base wages has
been negligible. The growth in average regular wages has remained low at about
1% (YoY, Chart 5).
Energy price inflation may increase in 2017. The US Energy Information Administration projects Brent oil prices to rise to US$ 51/barrel in 2017 from US$ 43 in
2016. Every 10% rise in crude oil prices is estimated to boost Taiwan’s CPI by 0.3%.
Note that energy inflation has been deeply negative since 2H14 (Chart 6). The
swing from negative to positive would push up CPI inflation notably in 2017 versus 2016, by about 1ppt (oil prices assumption: US$ 50).
Food price inflation may offset energy prices to a large extent. Food inflation this
year has been the highest in eight years (5% on average in Jan-Oct16). Vegetable
prices shot up in 1Q16 due to cold weather, and again in 3Q16 due to typhoons
(also Chart 6). Considering the high base, there is a good chance that food price
inflation falls in 2017. If fresh food prices stay at current levels, CPI inflation would
be lowered by a full percentage point in 2017 versus 2016. This would likely offset
any rise in energy price inflation.
4) The central bank will keep rates low
A modest economic recovery will reduce the need for Taiwan’s central bank (CBC)
to cut rates but would not be sufficient to prompt hikes. The output gap will remain negative in 2017 as GDP growth is expected to stay below the potential rate
of about 2.5% [1]. Note that the CBC kept monetary policy accommodative after
3
Taiwan: 7 likely outcomes in 2017
15 November 2016
Chart 8: CBC's policy rate vs. FFTR
Chart 7: Policy rate vs. output gap
% pa
Output gap (RHS)
Policy discount rate
4.0
% of GDP
8
6
3.0
6.0
CBC discount rate
5.0
FFTR
4
2
2.0
0
-2
1.0
4.0
3.0
2.0
-4
-6
0.0
Mar-02
% pa
-8
Mar-05
Mar-08
Mar-11
Mar-14
1.0
0.0
Jan-02
Jan-05
Jan-08
Jan-11
Jan-14
the 2008 global financial crisis. The last time it started to hike rates, it waited until
the output gap turned significantly positive in 2010 and inflation risks started to
surface (Chart 7).
Notwithstanding Fed rate hikes and a stronger USD, the CBC may not raise interest rates. An orderly depreciation of the TWD would be tolerated, thanks to Taiwan’s low foreign debt burdens, low inflation and strong external asset position.
Indeed the CBC has decoupled from the Fed over the last several years. It raised
rates in 2010-11 when the Fed pursued QE2, and cut rates in 2015-16 when the Fed
began to withdraw stimulus (Chart 8). There are reasons to expect that the CBC
will continue to focus on domestic fundamentals and keep short-term rates low in
2017 (benchmark discount rate: 1.375%).
Long-term TGB yields could feel the spillover effects from rising UST yields. But
the CBC’s accommodative policy stance will also impact the long end of the curve.
The correlation between the 10Y TGB yield and the 10Y UST yield fell to 0.55 in
2010-16 from 0.81 in 2000-09, thanks to the CBC’s policy divergence with the Fed.
5) Property prices will remain high
Better GDP growth, stabilizing labour market and still-low interest rates should offer support to the property market. Banks’ home mortgage loans have rebounded
moderately this year, and the pace of property price declines has slowed, mainly
thanks to low interest rates (Chart 9-10).
Chart 9: Banks' consumer loans: home purchases
Chart 10: Property price indices
% YoY
Mar05=100
8
250
7
230
6
Cathay index
210
5
4
190
3
170
2
1
150
0
130
-1
110
-2
-3
Jan-08
Sinyi index
Jan-10
Jan-12
Jan-14
Jan-16
90
Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16
4
Taiwan: 7 likely outcomes in 2017
15 November 2016
Chart 11: BOP: outward investment
Chart 12: BOP: current vs. financial account
USD bn
USD bn
10
80
0
60
-10
40
-20
20
-30
0
-40
-20
-50
-60
-40
Direct investm ent
-60
Portfolio investment
-70
Current account
Financial account
-80
2001 2003 2005 2007 2009 2011 2013 2015
2001 2003 2005 2007 2009 2011 2013 2015
From a longer-term perspective, Taiwan’s property market remains on a correction
path. After rising for 10 years, home prices peaked in 2014 and started to head
south from 2015 (also Chart 10). That said, a hard landing doesn’t seem likely in
2017, given the absence of income/interest rate shocks on the horizon.
Demographics is a long-term negative for Taiwan’s property market. The size of
population aged 20-50, an indicator for the combination of first-time and upgrade home demand, will shrink by 0.7% YoY (or 76,000 persons per year) during
2017-2020. But this could be partially offset by other structural factors such as urbanization and nuclear family formation. Urban population currently accounts for
79.8% of Taiwan’s total population. This is lower than in Korea (82%) and Japan
(93%). If urbanization proceeds at the pace of the past decade, urban population
would increase by about 50,000 persons per year in 2017-20, creating a new potential source of property demand.
6) Outward investments will be large
Low TWD interest rates, Fed hike expectations and a globally strong USD should
encourage capital outflows by domestic residents. Outward portfolio investment
was exceptionally large in the past three years (Chart 11). The Fed ended QE in
2014 and started to raise rates from end-2015. The CBC, on the other hand, embarked a modest easing cycle from late-2015. The unfavourable TWD-USD yield
spreads prompted Taiwanese insurance firms and other financial institutions to reallocate portfolios towards foreign bonds and other assets. This situation is likely
to persist in 2017 as the Fed is poised to raise rates while the CBC stands pat.
Relatively weak domestic (versus global) growth could bring a rise in outward direct investment by Taiwanese companies. While Taiwan’s ODI in China has cooled,
investment in other emerging markets has high growth potential. The government is currently pushing for the “New Southbound Policy” to assist Taiwanese
companies to invest in Southeast/South Asia.
Domestic capital outflows shouldn’t be looked at askance. Outward investment
helps Taiwan to tap the relatively strong growth opportunities in overseas markets and to boost its national incomes. Notwithstanding the depreciation pressure
on the TWD in the short-term, investment earnings will be repatriated home and
reflected in the current account. Indeed, Taiwan has maintained a large current
account surplus over the past decade (9% of GDP on average), which helped to
counteract the financial account deficit and supported the currency (Chart 12). In
2017, the current account is likely to remain in solid surplus territory thanks to a
recovery in exports and only modestly higher oil prices (a rise in oil prices to US$
50/bbl in 2017 would reduce Taiwan’s CA surplus by just about USD 2bn, or 0.4%
of GDP).
5
Taiwan: 7 likely outcomes in 2017
15 November 2016
7) Government policies focus on the structural issues
A modest economic recovery should reduce the need to pursue fiscal stimulus and
make it easier to manage public finances. The central government’s assumption
of 1.3% revenue growth in 2017 is conservative, taking into account the lagging
nature of tax collections. The plan for spending growth (1.1%) is conservative
too. With the fiscal deficit expected to remain low next year and the average TGB
yields expected to stay below nominal GDP growth (about 3%), public debt dynamics are positive. The central government’s debt as a percentage of GDP, which
peaked in 2012 at 36%, is likely to continue its gradual downtrend in 2017.
A cyclical improvement in the macroeconomic environment would also allow the
government to focus on the long-term structural issues and pave the way for reform. The key elements of President Tsai’s reform plans are industrial innovation,
trade diversification and economic/social fairness [2]. More initiatives surrounding
the “Five Innovative Industries Plan” and the “New Southbound Policy” could be
expected next year. These include but are not limited to: deregulating rules to encourage business start-ups in the innovative sectors, offering incentives to attract
advanced FDI and high-end foreign talent, and increasing the information and
financial supports to help Taiwanese firms to access the Southeast/South Asian
markets [3]. Pension reform, elderly care, youth employment and social housing
could also be priorities for government in 2017.
Sources:
All data are sourced from CEIC, Bloomberg, National Development Council (Taiwan),
Ministry of the Interior (Taiwan), and the World Bank. Forecasts and transformations
are DBS Group Research.
Notes:
[1] Taiwan: 5 things you need to know about the aging population, August 2016
[2] Taiwan: after the election, January 2016
[3] Taiwan: diversifying into Southeast Asia, October 2016
6
Taiwan: 7 likely outcomes in 2017
15 November 2016
Recent Research
Global: revenge of the demographic dividend
14 Nov 16
ID: tax revenues slipping
11 Aug 16
10 Aug 16
US: structural interest rate compression
2 Nov 16
SG: labour market pain
FX: Mid-quarter update
1 Nov 16
IN: monetary policy in transition
8 Aug 16
SG: down but not out
1 Nov 16
FX: DM vs EM - a more balanced story
1 Aug 16
Rates: Global rates roundup
31 Oct 16
Rates: Global rates roundup / chart-pack
1 Aug 16
TW: diversifying into Southeast Asia
21 Oct 16
IN: Hopes high for GST
26 Jul 16
CN: cyclical bottom
19 Oct 16
JP: will the helicopters fly?
20 Jul 16
IN: assessing current account
improvement
18 Oct 16
ID rates: steepening risk
18 Jul 16
IN: more consumption-led growth
13 Jul 16
PHgov bonds: expensive (still)
11 Oct 16
SGD: sticking to neutral 7 Oct 16
EZ: not taper time yet
7 Oct 16
CN: avoiding the Minsky moment
6 Oct 16
IN: monetary policy committee lowers rates
4 Oct 16
Qtrly: Economics-Markets-Strategy 4Q16
FX: revisions to GBP & JPY
8 Jul 16
TW & KR: how low can rates go?
7 Jul 16
US: a risky mantra
4 Jul 16
PH: Duterte’s game plan
4 Jul 16
EZ: dealing with post-Brexit blues
30 Jun 16
SG: Brexit impact limited for now
28 Jun 16
Britain’s Great Leap Backward
27 Jun 16
Brexit – first impact
24 Jun 16
15 Sep 16
CNH: SDR inclusion - right time, right place
8 Sep 16
IN: savings rate in need of a boost
2 Sep 16
IDR: towards further resilience
1 Sep 16
30 Aug 16
IN: maturing FCNR (B) deposits a molehill,
not a mountain
10 Jun16
SGS: on Fed watch
Global growth: redefining strength
26 Aug 16
Qtrly: Economics-Markets-Strategy 3Q16
9 Jun 16
TW: 5 things you need to know about the
aging population
18 Aug 16
HK: cautious outlook
27 May 16
IN: monitoring external fault lines
25 May 16
SG: risks beneath the GDP figures
18 Aug 16
TH: manufacturing gone cold
25 May 16
CN: the risk of keeping status quo
17 Aug 16
SGS: bracing for the Fed
24 May 16
CN: why falling private investment growth
is a worry
12 Aug 16
Global: Where lies north?
16 May 16
Disclaimer:
The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable,
but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness
for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have
regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is
published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should
obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts
no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use
of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof,
even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer
or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or
services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect
transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or
country where such distribution or use would be contrary to law or regulation. Sources for all charts and tables are CEIC and Bloomberg unless
otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company
Registration No. 196800306E.
7